PPP: Update on “Necessity” Requirement

Attorney Keith T. Zimmet

Keith T. Zimmet | President, Managing Shareholder

May 13, 2020

(as of May 13, 2020)

On March 27, 2020, Congress passed and the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which is an approximately $2 trillion stimulus and economic relief package. One principal feature is the Paycheck Protection Program (“PPP”), to be administered by the Small Business Administration (“SBA”). On April 24, 2020, the President signed into law the Paycheck Protection Program and Health Care Enhancement Act, providing additional funds for the PPP (the “Enhancement Act”).

On April 23, 2020, the SBA, in consultation with the U.S. Treasury, added a new standard of eligibility, not previously provided, which requires all borrowers, even those who have already received PPP loan proceeds, to assess their economic need for a PPP loan. Borrowers must be able to certify in good faith that current economic uncertainty makes the PPP loan request necessary to support the ongoing operations of the borrower, and requires a borrower to:

“tak[e] into account their current business activity and their ability to access other source of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.”

With respect to those borrowers who applied for a PPP loan prior to the issuance of such new SBA guideline, and who now believe they are no longer eligible, the SBA provides a safe harbor provided such borrower repays the PPP loan by May 14, 2020 (originally May 7, 2020).

This morning, the SBA added a new Item 46 to its Frequently Asked Questions, which clarifies how the SBA will review a borrower’s required good faith certification concerning the “necessity” of their loan request, and the consequences should the SBA determine that the borrower lacked an adequate basis to make such certification.

LESS THAN $2,000,000. With respect to any borrower, who together with its affiliates, borrows less than $2,000,000 under the PPP program, the SBA shall deem such borrower’s certification of necessity to have been made in good faith.

$2,000,000 OR MORE. With respect to any borrower, who together with its affiliates, borrows $2,000,000 or more under the PPP program, if the SBA determines upon its review that a borrower lacked an adequate basis for the required certification of necessity, the SBA will:

(a) seek repayment of the outstanding PPP loan balance; and

(b) inform the lender that the borrower is not eligible for forgiveness.

If the borrower repays the PPP loan after such notice from the SBA, the SBA has stated that it will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to certification concerning necessity of the loan request.

Specifically, FAQ Question 46 provides as follows:

46. Question: How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?

Answer: When submitting a PPP application, all borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.

SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.

Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance. SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request. SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.

Keith T. Zimmet is the Chair of our Commercial Finance Practice Group, and President and Managing Shareholder of our firm.

This information provides an overview of a specific developing situation. It is not intended to be, and should not be construed as, legal advice for any particular fact or situation.

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